What I Look for in Cryptocoins

I sat around in a circle of 10 people, many of whom are pretty well credentialed by startup ecosystem standards and asked people to raise their hands if they owned any cryptocurrencies. Almost everyone raised their hands. I then asked if anyone in the circle could articulated their thesis or how they are trying to value their holdings. Nobody could. Literally, and quite candidly, the entire circle basically answered “Fear of Missing Out.” And that was a conscious and willing investment thesis to put tens or hundreds of thousands of dollars behind.

Personally, I have been pretty disciplined about resisting the urge to trade these crazy swings and spurts in the cryptocurrency landscape. I hold some assets that are openly traded today, but only with an eye toward 5 years+ into the future. For me, riding momentum into a 100% gain in 2 weeks does not make you a sophisticated cryptoinvestor, it makes you a reasonably good gambler…and there’s a difference.

The questions I find myself asking, are often around how people will try to start fundamentally valuing coins and currencies, whereas today I think the level of analysis is quite crude. Wealthy retail investors and instituions alike look at inputs like

notable founders / early contributors

branded institutional backers

trading volume

technical integrity of the whitepaper and protocol design

moderately understandable utility promise

and i’m sure a bunch of technical trading indicators that I won’t pretend to understand

I’m all for making decisions on limited data…i built an entire career out of doing that as an early stage venture capitalist…but there is a difference between buying semi-blind, pre traction securities at $3-10M valuations, and doing the same at $300M-$10B valuations.

My attention has gravitated a bit, beyond the excitement of “pubic market” frenzy, toward more pre-ICO investing opportunities. There is a period before a blockchain project conducts their ICO (Initial Coin Offering), that looks very similar to the earliest days of a startup, where a small number of contributors works to design their protocol and build their technology before going to market..and that’s an area where I think I can be helpful…and candidly it’s an area that is somewhat insulated from the frenzy of speculative capital that is driving interesting and uninteresting projects into statospheric valuation (as measure by market cap). I still own a lot of “public” coin, but I hold a very firm belief that there will be better entry points even for projects of deep merit, than are available in today’s landscape.

On the pre-ICO side, there are certain shapes of project and characteristics that I find myself looking for. I won’t claim these attributes are science…some of them are deeply reasoned, and some of them are feel (which you can trust my feel or not give a shit about it as an input)…but regardless they are things I believe are important and leading indicators of value. I’ll try to outline some of them below:

1) Native protocols and applications: I am most interested in projects that simply could not exist prior to the Blockchain. There is a large body of projects that are simply the decentralized alternative to an existing centralized solution or service, there are not my focus. I think the ideology around decentralization is important, especially because it is powerful enough to harness early user participation in the absence of compelling economic incentives, but the upside of a decentralization-first value proposition as the defining attribute of a project feels capped at say a Duck Duck Go sized opportunity if I can draw that parallel (respect for Duck Duck Go btw, i’m just hunting for elephants to a certain extent here).

2) Bottom Up: For me, I am interested in the blockchain’s ability to organize a group of people or businesses into a specific behavior that has not previously been organized. This is not the only path or complexion of opportunity in the space, but it’s the one I’m most excited about. In areas where the margin was not available or interesting enough for a top down enterprise to pull customers or users together to act or behave a certain way, I see opportunity for blockchain projects to thrive. In areas where the will or incentive wasn’t their for governments or political bodies to organize a group of citizens or businesses to behave a certain way, I see opportunity for blockchain projects to thrive.

2) Public not Private: For me, private chains (blockchain projects that a closed group of participants utilize often for a specific cost savings or efficiency) are completely uninteresting. I think there will be real value built their, but these projects look more like enterprise software companies than movements or networks and I find enterprise software completely boring. Also, I think their upside feels capped for the most part at sub $10B enterprise values, where as I believe there will be 1 or more public projects beyond Bitcoin and Etherium that will achieve market caps in excess of $50B.

3) Deep integration of coin into Protocol or service: ICOs and coin models are in vogue…and that’s not surprising given the market caps and available capital flowing into the sector as a whole. Without having waded through the now thousands of projects in the market, I can say with some confidence that the coins surrounding certain protocols are very much slapped on top of projects or software as opposed to deeply and natively integrated into the functioning of the service. If you think about the difference between Google monetizing their search service with Display advertising vs Adwords, that’s a not perfect analogy to the difference between deeply integrated coin designs and those that are slapped on top. To do this will requires deep elegance in design. I am not personally a fan of Steem, for a number of reasons, but their entry into the landscape was an expression of what’s possible along this axis, and I think that contribution opened up many eyes to how coins can interact with utility of a service or software that rides on top of a protocol. I think Etherium’s gas model is also a good example of this. Getting this right feels like a requirement to me, and also a double edged sword in today’s speculative wild wild west market. The reason double edged, is because elegant integration actually makes it easier to fundamentally value and measure the utility of a project and it’s corresponding coin value. I can start to grasp at hard metrics and build a model around the number of downstream projects being built on Etherium, their level of interaction/dependance with the Etherium blockchain, and the corresponding demands for gas in way that I can’t really for many others. If the “store of value” use case starts to fall away from Etherium and consolidates around Bitcoin, the utility measurement around Ehterium’s developer facing use case as it’s killer application (which I think is undeniably strong) will start to raise questions as to whether it is $4B market cap strong or $18B market cap strong today…and I think that’s very possibly coming.

4) Non-zero sum actors: It took me a while to figure this one out. When I started to look at protocol designs on the blockchain, I thought primarily with my economic mind. The blockchain is a great tool to structure and restructure economic incentives between a group of people or companies, and so it’s logical to try to speak to every participants economic rationale when designing for usage and liquidity of behavior. The interesting thing is that when you try to incentivize multiple parties on opposite sides of a transaction or behavior with money alone, most designs net out to zero. Value attained by one party is given by another, and in thin margin environments it’s tough to get the flywheel spinning. What I realized, first through the aforementioned ideology around decentralization, but later through other non-economic incentives, is that interesting designs allow for specified nodes or roles to house actors with variable incentives or reasons for participation. In designs where two parties on opposite sides of a transaction or behavior both feel like their winning, despite one of those two parties objectively winning from an economic standpoint, liquidity of behavior is easier to achieve. Lastly, I think it’s important to point out that in cases like this that occur within services owned or run by a company, the available margin of non-zero sum actors tends to be sucked up by the company itself, in the form of margin. I like that in these decentralized models that value gets 100% spread over the other participants in the protocol, greasing behavioral liquidity without the liquidity-stifling rake of a company that’s hosting it’s participants.

5) The role of speculation as a means to liquidity of behavior: When a participant in a protocol contributes work, excess owned resource, or even faith in an earned coin vs exchanging it for BTC or Fiat, actors who are not participants in the protocol itself can speculate on a projects coin. So if a protocol organizes for the behavior and potentially also the exchange of work, time, or value between parties A, B, and C in a blockchain based project, investment capital from outside investors represents party D, who is not fundamentally using the service in which she is investing. Party D could be someone who got rich of Bitcoin who is now realizing their profits and diversifying into new coins, or it could be a hedge fund on wall st, buying a basket of cryptocoins because it’s an emergent asset class that has low correlation to their other holdings. But not all speculative capital enhances the value of the underlying protocol. It is possible to design a system where the speculative capital spreads value over some or all of parties A, B, or C, in a way that makes early participation in the behavior we’re shooting for more likely. This can be a real asset when the terminal form of the service offers better economics to participants than are available in the early days, and in that case speculative capital is designed into the success of the protocol. In other cases, the economic incentives baked into the protocol don’t improve absent of price gains resultant from outside speculation, and that feels like a much less sustainable position.

6) Organizing behaviors that are naturally transactional: Not all behaviors can be incentivized through economics or money. If you try to pay participants to do something that people tend to do for love, or self-expression, or any other non-economic reason, I think that’s a path to illiquidity of behavior and weak value of end product or service. I think Steem suffered form this, and I think others will too, especially as product thinkers start to hone in on the ideologies of their participant base. If money doesn’t fit in naturally to a behavior your trying to organize, I think your barking up the wrong tree trying to incentive participation via a coin model.

7) Collective economic force: This is not a deeply baked idea, but I am interested in exploring blockchain projects that attempt to organize large groups of people from the bottom up to act or express collective economic force. I wrote this post on “Blockchain based tax resistance” as an example, but there are many more possibilities that I think are well suited to this space and I can’t wait to see them. Everything from Coops to collective bargaining to group buying are intriguing and I see many natural points of interface between blockchain based collectives and “real world,” non blockchain based entities, businesses, and even governments that give a louder voice to the individual in contexts previously dominated by groups economically and administratively organized under more traditional structures like corporations or evn NGOs.

8) Shit this list is getting long. I’ve actually got a bunch of others, but if you’ve made it this far, I’m guessing you’ll see that I am beneath the surface of his world and excited and eager to help put language around projects of value. If I can be of help in the design, financing, or even communication around a project you are working on, I’m excited to invest or help or whatever. Jordan.Cooper@gmail.com

Bonus: At different points along my learning, I’ve tried to express some of these principles in designs i’ve outlined for fun. Here’s some early projects I thought would be cool:

IMPORTANT: I am not an expert here. I’m learning as I believe even the experts in this world are…there are very few people in the ecosystem who truly have this stuff all figured out, despite how they may posture. Help me if I’m wrong about any of this stuff, or share what I have considered in the comments or via email. Would appreciate learning with others.